Subchapters Corporation Tax Status

Subchapters Corporation Tax Status



Subchapter S Corporation Tax Status
Overview of​ the​ Subchapter S Corporation Designation
Although the​ term Subchapter S Corporation sounds as​ if​ it​ applies to​ a​ certain type of​ company,​ in​ actuality,​ it​ is​ merely a​ term used by the​ IRS Internal Revenue Service to​ designate a​ particular tax status. Almost any company that is​ comprised of​ 75 or​ less shareholders can apply for the​ Subchapter S Corporation tax status designation. Being approved for a​ Subchapter S Corporation status allows the​ company to​ be taxed as​ if​ it​ were a​ partnership or​ sole proprietorship. An application is​ generally submitted just after a​ company has incorporated. at​ any time a​ company may choose to​ withdraw from Subchapter S Corporation tax status by filing another form with the​ IRS. Withdrawals must be submitted prior to​ the​ beginning of​ a​ new tax year.
Subchapter S Corporation Eligibility Requirements
In order for a​ business to​ qualify as​ an S Corporation,​ there are several eligibility requirements that need to​ be met. Any corporation that meets the​ following criteria can be approved for Subchapter S Corporation status
* the​ company must have 75 or​ fewer shareholders,​ and each shareholder must agree to​ file as​ an S Corporation.
* Every stockholder must be a​ resident and citizen of​ the​ United States
* Stock sold by the​ company must be of​ a​ single class
* the​ company is​ required to​ use the​ calendar year as​ the​ official fiscal year
If a​ corporation meets these requirements,​ they must file form 2553 with the​ IRS to​ be granted Subchapter S Corporation tax status.
Advantages to​ Subchapter S Corporation Status
This tax status is​ appealing to​ many business owners for several reasons. the​ primary advantage to​ filing as​ an S Corporation is​ that income is​ passed through directly to​ the​ shareholders who file corporate income with their personal taxes. in​ this manner,​ the​ corporation avoids being taxed twice for the​ same income. in​ most cases,​ S Corporations do not pay any income tax and losses are absorbed by the​ shareholders instead of​ the​ corporation. Additional advantages to​ Subchapter S Corporation tax status includes
* Return on​ investment earnings do not fall under selfemployment tax status providing the​ shareholder/employee receives reasonable compensation for their work.
* Financial documentation and accounting is​ less complicated than that required by traditional corporations.
* S Corporation status may provide easier access to​ credit resources,​ depending on​ the​ business history of​ the​ corporation.
Disadvantages to​ Subchapter S Corporation Status
When considering whether or​ not to​ file for Subchapter S Corporation tax status,​ companies should also be aware of​ potential disadvantages. Because the​ financial power is​ in​ the​ hands of​ the​ shareholders,​ executive decisions need to​ be agreed upon by all. Disagreements between individual shareholders can lead to​ a​ stall in​ the​ process. Additionally,​ stockholder/employees must declare health insurance and other employee benefits as​ taxable income if​ they own more than a​ 2% share of​ stock. Subchapter S Corporation tax status is​ most beneficial to​ corporations with small numbers of​ shareholders that have a​ common vision for the​ future of​ the​ company.




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